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HOT 3Q2010 CONF CALL NOTES

In line quarter but Q4 guidance below.  2011 guidance looked strong but similar to MAR, is there enough visibility for high single digit RevPAR guidance?


“We were able to beat expectations thanks to our top-line growth initiatives that powered third quarter REVPAR results. Our distinctive and compelling brands are gaining share, and our strong presence in the key global cities positions us well to benefit from the return of the business traveler.”

- Frits van Paasschen, CEO

 

HIGHLIGHTS FROM THE RELEASE

  • WW System-wide REVPAR (SS): +10.0% (11.1% in constant dollars)
  • System-wide REVPAR (SS) in North America: +10.6% (10.0% in constant dollars)
  • Worldwide SS company-operated gross operating profit margins: +140bps
  • Worldwide REVPAR for branded SS Owned Hotels: +10.8% (12.5% in constant dollars)
  • REVPAR for Starwood branded SS Owned Hotels in NA: +12.5% (11.2% in constant dollars)
  • Margins at Starwood branded SS Owned Hotels Worldwide: +110bps
  • 3Q 2010 included a "pretax charge of $55 million ($52 million after tax or $0.28 per share) and were primarily related to the loss on the sale of one hotel. Special items in the third quarter of 2009 included an $11 million after tax benefit or $0.06 per share primarily related to a tax benefit on a hotel sale."
  • "In North America, supply growth in the Upper Upscale and Luxury segments is expected to fall below 0.5% in 2011, and remain at these low levels for a few years to come."
  • "During the third quarter of 2010, the Company signed 20 hotel management and franchise contracts, representing approximately 4,500 rooms, of which 15 are new builds and five are conversions from other brands. At September 30, 2010, the Company had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms."
  • There was almost no room attrition in the quarter with 3,300 rooms entering the systems and only 300 rooms exiting.
  • "Originated contract sales of vacation ownership intervals decreased 4.8% primarily due to lower tour flow and a lower average price. The number of contracts signed decreased 3.6%...and the average price per vacation ownership unit sold decreased 2.5% to approximately $14,000, driven by price reductions and inventory mix."
  • "On September 29, 2010, the Company completed the sale of one hotel for gross proceeds of $70 million. This hotel was sold subject to a long-term management contract." (Aspen St. Regis)
  • In 3Q2010, HOT "completed the securitization of approximately $300 million of vacation ownership notes receivable. Approximately $93 million of proceeds from this transaction were used to terminate the privately placed securitization completed in June 2009. The net cash proceeds from the securitization were approximately $180 million."
  • "The Company expects to receive a tax refund of over $200 million during the fourth quarter of 2010."
  • 4Q2010 Guidance:
    • Adjusted EBITDA of $230-235MM -which is unchanged from HOT's guidance and consensus of $245MM
    • SS company operated WW RevPAR: 7-9% in constant dollars
    • RevPAR for Branded SS owned hotels WW: 7-9% in constant dollars
    • EPS: $0.36-$0.38 vs. consensus of $0.38
  • 2011 Guidance:
    • Assume continuation of current trends
    • SS company operated WW RevPAR: 7-9% in constant dollars
    • RevPAR for Branded SS owned hotels WW: 7-9% in constant dollars
    • Adjusted EBITDA of $950-$990MM (consensus at $965MM)
    • EPS: $1.44-1.55 (vs. consensus at $1.50)

CONF CALL NOTES:

  • Asia Pacific accounts for 22% of their fee income and over 60% of their pipeline
  • The lodging recovery continues despite the economic malaise. Both business and leisure travel continue to show improvement.
  • Strength in gateway cities is spreading to secondary markets
  • Corporate rate negotiations - like what they are seeing so far
  • In Sept, booking for 2010 were up 19%, and revenues for 2011 were up 30%
  • 2011 group pace is now flat with last year.  Think that 2011 group bookings can match 2008 levels.
  • Close rates in VOI are steadily improving
  • Will generate $220MM of cash in timeshare this year
  • Headcount is flat over 2009 and expect it to remain flat in 2011
  • Plan to open 86 hotels in Asia Pacific in the years ahead - with the greatest number in China
  • RevPAR growth in China was up 33% 
  • EMEA division President:
    • Europe: Will have 22 openings in Central Europe over the next few years
    • Plan to open 20 hotels in the next 3 years in the Middle East. Saw rates turn positive in September
    • Africa has experienced substantial growth: 30% unit growth.  RevPAR increase 5% this past quarter (ADR increase offset by occupancy declines)
  • Latin America:
    • Mexico saw RevPAR growth of 4% in the 3rd quarter
    • There was a 2 point increase in margin
  • Goal is to hold cost growth at half the rate of inflation
  • Think that they can exceed past peak levels
  • India update: 29 hotels open and 18 under construction. They are the largest hotel chain in India.

Q&A

  • They expect a double digit increase in RevPAR for 2011 in China
  • Incentive fees are currently driven by international fees and will grow more in-line with international RevPAR
  • Unit growth assumptions for 2011?
    • Looking to open 80 hotels in 2010 and a little less in 2011
  • Expense growth: European RevPAR growth was weak and there was more incentive comp...
    • Greff actually asked some good questions and they answered none of them.. hmmm
  • Last year they got business interruption insurance for H1N1 in 3Q09
  • Mgmt and franchise fees are low for next year
  • Rates in secondary citites in China are about 33% lower than in primary cities but yields are still attractive to owners. 
  • Use of cash: They will step up investment in their owned hotels... aside from that, they will update the Street on that during the Dec 8th analyst day. They will also continue to focus on debt reduction to become investment grade.
  • Why is their luxury RevPAR growth lagging?
    • Bulk of their collection is in Europe and they had a nasty FX impact
  • Would like to do a larger M&A sale but there are a lack of buyers right now


PNK: MARGINS, MARGINS, MARGINS

PNK beat our Street high EBITDA estimate pretty handily.  Margins were better at every property – and they’re not done yet.

 

 

The PNK thesis is a secular margin story.  EBITDA improvements are likely, even in a soft regional gaming environment.  We like that PNK is 18 months behind the industry in terms of cost cutting.  We like that previous management thought that three corporate headquarters and a couple of corporate jets were appropriate, that marketing was like a government agency that needed money thrown at it but didn’t need to produce results, that a fabulous high cost development pipeline was what mattered, and that they really didn’t care about margins.  The new management is a beneficiary of previous management’s mismanagement, if you will.

 

It’s not like the margin story isn’t well known.  Consensus EBITDA projection was higher than last year despite sluggish revenues.  However, we were a lot more bullish on the size of the margin improvement which drove our Q3 EBITDA estimate to $56.1 million versus the Street at $51.5 million.  So where did they come in?  $60.2 million.  This management team is doing a great job.  Forward estimates look too low.

 

PNK beat us in EBITDA at every property.  While revenues were slightly better overall, margins were the story.  Here are the numbers relative to our expectations:

 

PNK: MARGINS, MARGINS, MARGINS - PNK


INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR

Initial Claims Fall 21K to Levels Near Lows of the Year

We won't split hairs. The claims number this morning is solid. It pushes both reported claims and rolling claims to levels near the lows seen YTD. Clealry this is a big step in the right direction. The question is, we've been here before - now multiple times this year - will they go lower or is this as good as it gets? We'll keep a close eye on claims. Remember, claims in the 375-400k range are low enough to start making a dent in the unemployment rate.

 

The headline initial claims number fell 21k last week to 434k (18k before the revision of last week's print).  Rolling claims came in at 453.25, a decline of 5.5k over the previous week.

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - A

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - B

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - AA

 

Joshua Steiner, CFA

 

Allison Kaptur


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INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR

*** Our Updated Earnings Scorecard for Financials is Included Below ***

 

Initial Claims Fall 21K to Levels Near Lows of the Year

We won't split hairs. The claims number this morning is solid. It pushes both reported claims and rolling claims to levels near the lows seen YTD. Clealry this is a big step in the right direction. The question is, we've been here before - now multiple times this year - will they go lower or is this as good as it gets? We'll keep a close eye on claims. Remember, claims in the 375-400k range are low enough to start making a dent in the unemployment rate.

 

The headline initial claims number fell 21k last week to 434k (18k before the revision of last week's print).  Rolling claims came in at 453.25, a decline of 5.5k over the previous week.

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - rolling

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - raw claims

 

Yield Curve Moves Wider

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been collapsing in the past two quarters.  Yesterday’s closing value of 231 bps is up from 218 bps last week.

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - spreads

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - speads QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - subsector perf

 

Hedgeye Earnings Scorecard

Below we show our rolling earnings scorecard which includes all financials that have reported thus far in the earnings season, along with subsector averages and our proprietary Hedgeye Earnings Score. The score evaluates company performance across ten measures, looking for either sequential improvement or decline and performance relative to expectations. A "perfect" score would be 10 while the worst possible score is negative 10.

 

INITIAL JOBLESS CLAIMS DROP 21K APPROACHING LOWS OF THE YEAR - earnings scorecard

 

 

Joshua Steiner, CFA

 

Allison Kaptur


LVS: AND WE HAD THE HIGHEST ESTIMATES

Favorable mix in Macau, higher gaming volumes in Singapore, and better cost controls drove revenue and EBITDA higher than our Street high estimates.

 

 

Not much to say other than Steve Wynn must be kicking himself again for not bidding on Singapore.  Macau wasn’t too shabby either.  Las Vegas was a disappointment but who really cares other than MGM shareholders? 

 

 

Venetian Macau revenues were $15MM above our estimate and EBITDA was $16MM better

  • The revenue beat vs. our numbers came from
    • Mass revenues coming in $9MM better
    • Retail and other was $5MM better
    • F&B was $2MM
  • EBITDA was boosted by better fixed cost controls.
    • We estimate fixed costs were $91MM down $1MM from 2Q and 11% YoY. We assumed that Venetian has lapped their ability to cut costs and that fixed costs would increase to $95MM.
    • $5MM of lower commission payments to junkets due to a higher direct play mix which were completely offset by $6MM in higher taxes on better revenues
    • Bottom line variable expenses were in-line with our estimate despite better revenues
  • Direct play was 23% vs. our estimate of 21%
  • High Mass hold benefited property revenues by $21MM and higher than normal hold benefited VIP gross revenues by $17MM and we estimate that the impact on EBITDA was about $19MM

Not much to add on Sands Macau as revenue and EBITDA were exactly in-line with our estimates

  • Direct play was 14%, a few points above our estimate
  • High hold on VIP helped revenues and EBITDA by $9MM and $4MM, respectively
  • Slightly higher gross gaming revenues were offset by higher rebates which were 1% of RC
    • Could be partly due to higher direct play
  • Slightly higher non-gaming revenues were offset by higher promotional expenses
  • Implied fixed costs increased 2% YoY to $47MM

Four Seasons revenues were $22MM above our estimate and EBITDA was double our estimate

  • Why was our revenue number so off?
    • Net VIP revenues were $15MM higher than we estimated due to a rebate rate of only 83bps vs. a rebate rate that was 101bps last quarter on hold of 3.07% and a rebate rate of 94bps in 1Q2010 on a hold of only 2.5%.  The low rebate rate accounted for $10MM of the revenue difference while VIP gross revenues were also $5MM higher
    • Retail & other revenue was $7MM above our estimate; basically doubling QoQ
  • Why was EBITDA so off?
    • Variable expenses were only $2MM higher than we estimated on a revenue beat of $22MMM since the lower rebate brought down the total commission rate
    • Non-gaming margins are very high and non-gaming revenues were $6MM higher
    • Fixed expenses were only $20MM vs our estimate of $25MM
    • Put another way, last quarter, FS printed a $33MM EBITDA quarter with gross gaming win of $181MM and this quarter on $182MM of gross gaming win, they printed $49MM
  • Direct play was only 42% vs. our estimate of 50%, and therefore hold was actually not low as we had estimated but high at 3.08%
    • High hold boosted revenues by $11MM and EBITDA by $2MM
  • Mass play was $2MM higher than we projected but hold was also off the charts at almost 30%
    • High hold helped revenues by $4MM and EBITDA by $2MM

MBS reported revenues were $22MM higher and EBITDA was $6MM better

  • Bottom line – handle and drop were stronger than we estimated and beat our numbers despite low hold
  • Low hold depressed VIP gross revenues by $15MM and EBITDA by $6MM
  • Rebates were 1.34% this quarter or $135MM (basically difference between calculated gross gaming revenues and reported net casino revenues)
  • Fixed expenses were $145MM

Las Vegas net revenues were $19MM higher than we estimated but EBITDA was $10MM below our estimate

  • Casino revenues were $7MM below our estimate and rooms revenues were $4MM below our estimate, but F&B, retail and other were $30MM better, while promotional was exactly in-line
  • Operating expenses increased 20% YoY (Revenues- EBITDA)
  • Rebates were 3.6% of gaming revenues  and promotional expenses were 31% of gross gaming revenues
  • Added over 200 slots sequentially at Venetian

LVS: AND WE HAD THE HIGHEST ESTIMATES - LVS


American Solitude

“However many people you may consult, you are the one who has to make the hard decisions. And at such moments, all you really have is yourself.”

-William Deresiewicz

 

Those were the closing sentences of a lecture that William Deresiewicz gave to the plebe class at the US Military Academy at West Point in October of 2009. The lecture was titled “Solitude and Leadership.” It was posted in The American Scholar on March 1, 2010.

 

The timing of this lecture was critical. It was given by an ex-Yale professor at a time in American history when leadership was failing us. Deresiewicz is a literary critic who has no qualms calling today’s Yalies “professional hoop jumpers.” He taught Yale kids for 10 years; his opinion isn’t irrelevant. Whether we like reading it this way or not, the rest of the world thinks we’re still failing. Americans need to stop making excuses for losers. America needs winners.

 

Winning starts by having conviction in what you do, taking a stand, and beating someone. Whether on the field or in your portfolio, you can see the score during each second of the game. Don’t blame “depressions.” Embrace adversity. Confront your opponent. You have to play this game with passion.

 

Winning continues by staying true to what got you to start winning in the first place. Grit, guts, and determination works for some. Patience, poise, and flexibility works for others. You, at the end of the day, have to focus on being you.

 

Winning becomes your culture when you inspire your teammates to walk through walls with you. You cannot do this alone. American Solitude is having as much conviction in yourself as you have in your teammates. You have to trust them if you want them to trust you.

 

I’m giving you my 3 cents on this today because I’ve been travelling the American roads less travelled for the better part of the last 2 weeks. I’ve been in 8 different states (Connecticut, New York, New Jersey, New Hampshire, Massachusetts, Maine, Florida and Missouri). I’ve met with a lot of different people. I’ve also spent a lot of time on my own.

 

American Solitude is taking the time to think. As Deresiewicz said, “solitude can mean introspection, it can mean the concentration of focused work, and it can mean sustained reading.” Solitude can also mean friendship. “Long, uninterrupted talk with another person. Not Skyping with 3 people and texting with 2 others at the same time… talking to one other person you can trust.”

 

Whether your solitude is an hour long conversation at an airport bar in Kansas City, Missouri with Howard Penney or speaking with someone you never have enough time to listen to, we need to make time for conversation. Attempting to observe this interconnected world from behind your trading or manic media desk is a very dangerous place.

 

When I get back from the road, the first thing that people tend to ask me is “what are people saying?” or “what’s sentiment out there?” As if the cosmos lined up in a way where my perfectly qualitative sample survey can be disguised as quantifiable edge. Whether it’s right or wrong, that’s Wall Street.

 

The #1 headline on Bloomberg this morning is “FED ASKS DEALERS TO ESTIMATE SIZE, IMPACT OF DEBT PURCHASES.” So, after creating massive disconnects in global expectations and seeing both inflation and interest rates rise this week, look at what the New York Federal Reserve is doing this morning – giving conflicted and compromised bankers a “survey” on the size and impact of Quantitative Guessing. This isn’t leadership – this is a joke.

 

Can you imagine if another Washington (Ron Washington, the Manager of the Texas Rangers) took a stinking survey days before game-time? What in God’s good name would his players think? Ben Bernanke has stated this plainly, so take his word for it – he has no idea what QE’s impact will be.

 

A better question to ask yourself is what aren’t people talking about? What’s the risk that the current market debate is about the bark on a QE tree as opposed to the burning forest of credibility in the US economic system? What if the Chinese or Japanese sell Treasuries and rates rip higher?

 

What people aren’t talking about on Wall Street is the crisis of leadership in this country. We’re hyper focused on what group-thinkers at the Fed will do next. At the same time, the politicized members of this conflicted institution are being held hostage to where the political wind blows. We’ve stopped thinking about re-thinking US monetary policy altogether.

                                                                                                                                                                                                                                                        

I often get asked for my advice – what would I do? First, I say stop. That’s it. Just stop what these people are doing to your hard earned savings. Put that in your survey Bill Dudley. Stop. Then start to un-learn bad policy and re-learn the lessons of the US Military’s 2009 plebe class:

 

“We have a crisis of leadership in America because our overwhelming power and wealth earned under earlier generations of leaders, made us complacent, and for too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don’t know how to ask them. Who can fulfill goals, but don’t know how to set them. Who think about how to get things done, but not whether they’re worth doing…”

 

Yesterday was a win for my team. We sold volatility (VXX) on strength and we covered some shorts (XLY and HCBK) on weakness. We bought oil (USO) and we bought casino operator Pinnacle Entertainment (PNK). If the government is going to sponsor shortened economic cycles and amplified volatility, I’ll just as soon assume the position of American Solitude and trade this market proactively. Every man for himself.

 

My immediate term support and resistance lines for the SP500 are now 1168 and 1192, respectively. In the Hedgeye Asset Allocation Model, I now have a 61% position in Cash, 24% in Bonds, 12% in International Currency, 3% in Commodities, and 0% in both US and International Equities. In the Hedgeye Portfolio, I remain short both the US Dollar (UUP) and US Equities (SPY).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

American Solitude - AA


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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